The big four submitted the latest Banking Code of Practice, due to come into effect next year, provides an appropriate regulatory mechanism for small business lending.

The industry code of conduct was developed by the Australian Banking Association and for the first time has been signed off by corporate regulator ASIC — it is the main piece of regulation governing small business lending.

However, there are lingering concerns the updated version of the code provides banks with too much wiggle room in their small business dealings.

Australian small business and family enterprise ombudsman (ASBFEO) Kate Carnell has argued the code should be overhauled to address shortfalls in coverage, enforcement and the discretion afforded to banks.

In particular, the new code allows banks to employ their “reasonable opinion” of a circumstance in the event of a loan default, entitling them to provide less or no notice to business owners.

In their submissions, the banks said flexibility within the business lending framework should be preserved.

NAB said the rules should be broad enough for it to provide a “broad range of flexible lending solutions” to different types of SMEs.

“The enquiries and risk involved in lending to a well-established customer will be very different to that of lending to a customer establishing a new business,” NAB said.

“This requires case-specific assessment of the nature of a borrower’s business, or proposed business and borrowing needs.”

While small businesses have been finding it more difficult to get finance from major banks in recent years, it is still estimated the big four account for about 80% of SME lending.

The royal commission has uncovered allegations of fraud and the abuse of power in small business lending as well as incorrect interest fees though, sparking calls for better regulation.

Commonwealth Bank said in its submission alongside unfair contract laws, the banking code provided a framework which strikes an appropriate balance between access to credit and protection for business owners.

In his interim report, commissioner Hayne asked the banks to address the manner in which they make decisions about how they lend to SMEs under clause 51 of the new Banking Code of Practice.

This requires banks to form an opinion about a customer’s ability to repay a loan facility, while Hayne asked how much analysis banks should undertake in making this determination

Commonwealth Bank said in its submission it doesn’t believe cashflow statements and business plan documents are adequate on their own, but it was impossible to be “perspective” about the decision-making process.

“Ultimately, the decision to approve a business loan is a judgement call made by the bank, having regard to a number of factors, including the bank’s level of risk appetite,” it said.

ANZ also submitted flexibility was important in its ability to make determinations regarding SME lending, saying additional regulation regarding how banks make lending decisions would limit credit availability.

ANZ also addressed the definition of a small business under the Banking Code of Practice, an area of disagreement that has been raised by the ombudsman and other industry advocates.

The code defines a small business by three factors, including turnover being less than $10 million, there being less than 100 full-time equivalent employees and total debt to all creditors being less than $3 million.

There is disagreement over the debt limit, with Carnell arguing it should be pushed up to $5 million, but ANZ said this was appropriate in that it encompassed 98% of its business customers.

“In ANZ’s experience, organisations that exceed any one of these three components are larger and more sophisticated with more complicated lending needs,” it said.

Banks say guarantor protections are fine, despite horror stories

Hayne raised the prospect of reforms which would improve protections for loan guarantees, a practice that’s typical in small business lending.

The royal commission has revealed cases where people who have guaranteed loans have fallen on hardship and have subsequently found it difficult to resolve issues with the banks.

In one case, an elderly woman who guaranteed a $160,000 Westpac business loan was told her house was being sold to recoup losses after her daughter failed to repay her loan.

In its submission Westpac admitted it took too long to process a hardship application placed by the customer, noting the customer remains in her home.

However, the bank argued against strengthening protections for loan guarantors.

“Westpac’s general view is that people should be free to use their unencumbered assets as they choose, even if that use offers them no immediately identifiable economic benefit,” it said.

“In many instances, the decision to support a family member in a business venture is not made for financial reasons.”

Westpac said existing protections under the Banking Code of Practice also include decision making about whether guarantees should be accepted.

Commonwealth Bank also submitted there’s no need to “extend the law relating to the protection of guarantors beyond that which currently exists”.

“Amendments to the regime, in circumstances where sufficient protections already exist, are not only unnecessary but apt to lead to confusion and uncertainty around the efficacy of a guarantee,” it said.

NAB also said it believed the current framework was sufficient, explaining it adopts a “case by case approach” to guarantors.

The bank explained the new Banking Code of Practice, alongside ASIC and contracts protections, provide for a sufficient level of regulation.

‘While the Commission has exposed issues in the application of this legal framework, they do not imply that the framework itself is inadequate,” it said.

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